M^0 = 1 = Singleness | Making interoperable dollar onchain
I was excited to learn that Luca Prosperi, the author of Dirt Roads — a blog I greatly admire — is working on a new project called M^ZERO Protocol. Initially, when I read the fundraising announcement, I found it challenging to grasp the vision of the project. The description seemed impressive but also vague. After spending some time to read the M^0 whitepaper, I've begun to understand its scope and potential. This project is probably one of the most ambitious in the DeFi space and holds the potential to significantly disrupt the current stablecoin landscape.
I think the upshot is this: M^0 = 1 = Singleness. Now let me explain.
Singleness of money
One important concept we should familiarize ourselves with is the singleness of money. Simply put, singleness of money is the characteristic whereby different forms of money in an economy trade at par with each other and are not subject to fluctuating exchange rates. This means there is a definite and unmistakable unit of account across the entire monetary system that uses the same money system. This homogeneity in currency ensures the fungibility of money—each unit is interchangeable and equally acceptable.
In developed economies, the diversity of money types and their singleness may not be a conspicuous concern. Yet, money exists in multiple forms based on its IOU relationship. Physical cash, such as a $100 bill, represents an IOU from the US Federal Reserve. Conversely, bank deposits, displayed as digits in your banking app, are IOUs from your commercial bank, not explicit liabilities of the central bank. Despite seemingly equivalent, these forms of money—cash and bank deposits—are conceptually different but mostly convertible at par in practice.
For example, withdrawing cash from an ATM doesn't alter the money's value, but it does shift the liability from the commercial bank's balance sheet to that of the central bank. Similarly, transferring deposits from Bank of America to J.P. Morgan represents a shift in liability. But in reality people think of it as the same thing because bank deposits at BoA and bank deposits at JPM have the same value.
In a well-functioning economy, there's no need for the average person to understand these distinctions because there is a robust 'singleness' of money. However, such singleness should not be taken for granted, especially in emerging markets and developing nations.
When singleness breaks down
Take the case of Nigeria's Naira, which historically has not possessed 'singleness'. The Naira has had four different exchange rates, each reflecting a different value depending on the transactional context. According to the IMF's 2018 Article IV consultation for Nigeria, there are four FX rates of Naira at the time:
Official Central Bank of Nigeria (CBN) rate,
This is the pegged exchange rate set by the Central Bank of Nigeria primarily for government transactions.
Interbank Rate (Nifex),
This market-determined rate is used for transactions between banks.
Investors and Exporters FX rate (Nafax), and
Introduced in 2017, the Nafex rate is a market-driven rate designed to improve liquidity and encourage foreign dollar inflows for investors and exporters.
Bureaux de change (parallel market/black market rate)
This rate operates outside of official channels, determined by the informal supply and demand.
The presence of four distinct exchange rates indicates a lack of consensus on the true value of the Naira. Each rate reflects different perceptions, demands, and supply dynamics within the market. This fragmentation creates confusion and undermines the notion of a unified value for national currency. As indicated in the more recent 2022 IMF Article IV, despite efforts to unify the exchang windows of naira, the parallel market rate continues to diverge significantly from the official rate, illustrating ongoing challenges in achieving monetary singleness.
Dollars onchain lack singleness
Stablecoins are perpetual, non-interest-bearing debt with an embedded put option that allows them to be redeemed for collateral assets on demand. This means that holders are inevitably subject to the counterparty risk of issuers. At the same time, stablecoins are digital bearer instruments.
A bearer instrument is an instrument that can be transferred by mere physical delivery, without the need for endorsement or assignment. Its ownership is determined by possession, which means that the instruments serve as proof of ownership themselves, rather than being registered to a specific person/entity. Examples include bearer bonds, bearer shares. In contrast, a non-bearer or registered instrument records ownership with the issuer and requires endorsement or assignment to transfer ownership.
Stablecoins, once minted, can be transferred freely, and the value transmission is determined by the wallet address that holds it on-chain, rather than relying on the issuer to maintain a record of transactions. As such, stablecoins, being transferable liabilities of their issuers, are treated as financial assets with market prices that can fluctuate. These fluctuations in exchange rates from their par value can result from differences in the redemption process, settlement frictions or delays, and perceived credit risk of issuers, among other factors.
When Silicon Valley Bank (SVB) collapsed, USDC temporarily depegged due to uncertainties about its collateral backing. Theoretically, users could buy USDC below $1 and redeem it for a dollar worth of fiat money to capitalize on this arbitrage opportunity. However, in practice, this was not feasible since Circle does not process redemption on weekends.
The principle of singleness of money suggests a uniform risk profile within a given system. Yet, in a fragmented DeFi environment, each stablecoin has its own mechanisms for maintaining its peg, choices of collateral assets and governance structures, leading to varying risk levels. Furthermore, different stablecoins may adhere to varying degrees of regulatory compliance, creating a complex patchwork of legal standings.
This fragmentation challenges the principle of singleness, which is crucial for money. The M^0 protocol thus seeks to serve as a foundational layer of a modular money stack, aiming to create an infrastructure of ensuing dollar’s singleness onchain.
M^0 = 1 = Singleness
My guess is that the name 'M^0' derives from the principle that any non-zero number raised to the power of zero equals “1”, a single unit and digit, representing singleness. This aptly reflects the protocol's goal to consolidate the fragmented landscape of stablecoins into a single, robust currency standard.
M^0 introduces 'M,' an onchain value representation intended to combine the creditworthiness of physical cash with the tech advantages of digital money. M^0 is structured to function like the governor of the onchain dollar system, providing a set of defined rules and smart contracts that streamline the creation and exchange of M. This setup is intended to facilitate effective interactions among new and existing players in the offshore dollar market, and to address the current interoperability constraints of traditional stablecoin issuing model.
One a very high level, the protocol coordinates three groups of actors to achieve this:
Minters: Institutions authorized to connect to the protocol, generating and managing the supply of M.
Validators: Independent entities responsible for providing accurate, timely information regarding the off-chain collateral backing M. Their role is critical in maintaining transparency and trust in the underlying value of M.
Earners: Approved holders or distributors of M who are authorized by governance to earn at designated rates.
Instead of relying on traditional banking systems, M^0 and its governance mechanisms allow for a more decentralized and efficient way to manage fiat value onchain. The goal is to redesign parts of the money stack, rather than just adding another layer on top of the existing infrastructure.
Reconstructing the Money Stack
The concept of money and its flow through the economy can be conceptually grouped into several layers. This Money Stack I describe below is an adaptation from Joao Reginatto’s ‘A Brief Perspective on Money Technology’. There are several layers that make up our existing money system today:
Belief System:
The foundation of money’s value lies in the collective belief in its worth. Under the Commodity View, money is seen as a commodity asset like gold, silver or Bitcoin. Credit View considers money primarily as debt or a promise to pay—a network of IOUs circulating within the economy.
Governance:
The distribution and regulation of money typically occur through financial institutions, via loans and credit creation. Central banks play a critical role by managing money supply through mechanisms like open market operations.
Ledger/Record-Keeping:
Trust within the monetary system is upheld through accurate and reliable record-keeping. In fiat currency, this trust is predominantly placed in institutions such as governments and banks, which maintain detailed ledgers of transactions.
Transport/Settlement
Involves the physical and digital infrastructure required for moving money across different geographies and networks. Systems such as the Federal Reserve’s Fedwire or the international SWIFT network facilitate the settlement, clearing, and transfer of funds globally.
Utilization/Application:
Money serves various functions, including payment, storage, lending, and investing. Financial services such as credit cards, digital wallets, and broker-dealer platforms are examples of players in this layer, enabling users to utilize money in diverse ways.
Currently, stablecoin issuers predominantly function at the application layer, essentially acting as a digital overlay on top of the outdated banking infrastructure. In this setup, they mirror other fintech and virtual banking services by streamlining payments but typically fail to innovate at the foundational levels of the money stack. These operations remain centralized, adhering to conventional corporate structures.
M^ZERO seems to recognize that the true potential of blockchain extends beyond its role as a global settlement layer - it offers a transformative perspective on how carefully designed incentive systems can introduce new governance models. These models can be a significant improvement over traditional forms of capitalist institutions, such as firms and hierarchies. I look forward to seeing M^ZERO's development and progress in reconstructing the architecture of money systems to become more decentralized and resilient.